Forbes India 15th Anniversary Special

Modi taking tough, but right steps; 5.7% growth still good: JPMorgan Chase CEO

In an exclusive interview to CNBC-TV18, Jamie Dimon says that the Indian government is paving the way for long-term growth

Published: Sep 22, 2017 10:47:15 PM IST
Updated: Sep 23, 2017 01:54:34 PM IST

Modi taking tough, but right steps; 5.7% growth still good: JPMorgan Chase CEO
James Dimon, JPMorgan Chase's chairman and CEO
Image: Dylan Martinez / Reuters​

In an exclusive interview to CNBC-TV18, JPMorgan Chase's chairman and CEO talks about global markets in the face of a nuclear attack threat from North Korea, the US economy and global growth, and the measures undertaken by Prime Minister Narendra Modi, demonetisation, and India's GDP growth numbers.

Q: Your views on the North Korea nuclear threat and its implications on the globe.
Nuclear threat is the worst thing that is facing mankind and obviously, we hope that does not happen anywhere. It is not just here, it is around the world. So, there is a higher chance of something going wrong in the Korean Peninsula, it is slightly higher than it was before and I am hoping the experts of the world are doing all the right things to make that not come to fruition. But I do not think it is going to change my view of how we should go around the world and work with each other and grow our economies. It is just this terrible threat hanging out there.

Q: So you think the markets are right in not pricing anything? After all, the Asian markets have not fallen so much.
I would not price a crisis in North Korea nuclear war into the markets. I think that would be a mistake. I pointed out before; geopolitics is always a surprise, sometimes positive, sometimes negative. It always scares you when you read the paper in the morning, but in the history of mankind, it usually resolves itself. So I am not saying I am not prepared for a bad outcome, I am simply saying I would not expect a bad outcome.

Q: There are some market participants perhaps who are not suggesting that perhaps it is best to recognise that North Korea is a nuclear power - maybe that will be the more constructive way to approach. You have any thoughts on that?
I think it would be a mistake to allow a person who is like that to have a nuclear weapon. And remember, that nuclear weapon can reach Tokyo, Beijing, Shanghai, Manila, Seoul Korea and I think it is a scary concept. Most of the people who have nuclear weapons, they are responsible. He does not seem to be responsible. So no, I think that would be a mistake and it could lead to other problems. Like even when you shoot these missiles, it is over Japan. What if it landed in Tokyo by accident?

I just think those things can tend to have unexpected consequences that could be dire and we should be very careful about that. And also, I think China has a huge interest in him also not having nuclear weapons because if they are not part of the solution, you are going to have nuclear weapons, in my opinion, in Korea, you have nuclear weapons in Philippines, you have nuclear weapons in Japan, everyone will go nuclear if he stays nuclear and now you have a much bigger issue.

Q: Let us come to some measurable parameters. The Federal Open Market Committee (FOMC), the US Fed has stuck to its dot chart. Do you think they have done right with their latest move?
I think they are doing the right thing. Quantitative easing (QE), raising rates is not a big deal.

Q: But inflation has disappointed in the light of that.
I think inflation is a semi-artificial number. The economy is strong. I think it would be stronger if America did a lot of better policy, but the fact is unemployment is coming down, labour is working, wages are starting to go up. There is plenty of, in my view, slack in the system so the housing is in short supply, there are more things do and as long as they are raising rates or reducing QE in a strong environment, I do not think it is that big a deal. So I think they are doing the right thing to start this process.

Q: But there is a dichotomy here. The Fed's view is probably four or five rate hikes in the next 12 months, but the market is not pricing even half that. So what is the outcome if the Fed is right?
You cannot look at one thing separate from the other. If the growth picks up from here and the Fed is right and they raise rates a couple of times more that is a good thing. They are not going to raise rates, in my opinion if growth is much lower. It is hard to forecast the future, but they are saying if these things happen, you can expect the rate raises and at one point they would be more right than the market. This might be that inflection point.

Q: It is just that will there not be volatility in asset allocation, so should emerging markets worry if the Fed were right?
A little bit. But again, we see today in the world, it is almost synchronised, we have growth in Japan, growth in China, growth in Europe, growth in the emerging markets, growth in the US, Brazil has gone from negative to it's going to be positive this year, that is a good thing. So if you are in the emerging markets, the most important thing is they have growth. If America is doing a little bit better and the rates go up a little bit, it slightly changes the flow of funds between some of the emerging markets and the States that is trumped by the fact that you have more growth in the emerging markets. So, I would not be that worried about it.

Q: Actually, now that you speak about President Trump, the markets do not seem to be pricing much by way of tax reform. If he indeed delivered, do you think we have much more upsides in US equities and global equities?
Remember, it has been seven months and I do not think any president did something like a comprehensive tax reform in seven months. And the people in the administration, Secretary Mnuchin, the senators, the congressmen, all say they are going to work on it and they are going to get something done. We need comprehensive tax reform. It has been driving capital and brains overseas, it is hugely inefficient and I hope they get it done. I do not know the odds, I can guess, but you can guess just like I can. But, if they get it done and it is meaningful, I think it will drive formal growth in America. It is only one of the things we need to do. We need to also moderate some of the regulations, start to build infrastructure better, do better job in education. So I have been a strong believer that we are going to two percent in spite of not having good policy. We would be growing faster had we had really good policy.

Q: But the financial markets have otherwise been what Robert Shiller calls obese. He was on our channel saying that the US markets' cyclically adjusted price-to-earnings ratio (CAPE) is at 1929 levels. Is that a worry?
There are a lot of ways to calculate price-to-earnings ratios (P/E). Again when you are talking about the future, you have to say what you expect to happen. If the future is very bright, the P/Es will be fine. If you say they are in the upper quartile - the valuations, yes but that is because most people are projecting that things will be pretty good going forward. If you said to me we are going to have a recession next week, they are going to end up being 30-40 percent too high.

Q: Do you think the valuations are justified was my question?
They are justified if we have a pretty bright future.

Q: His point is markets are obese; they are not healthy, they are obese but obese people can live many years?
I have great respect for him. I think the world has synchronised growth. If it is followed with some good policy which you are doing in this country, which France is doing compared to tax reforms in United States, if those things happen, you are hoping of more growth in the world and that will justify valuations.

Q: Since you said this country, let me ask you more questions about your impressions on India. You come every year. You came three years back when the current government was sworn in. At the end of three-three-and-a-half years, what is the sense? Has the needle moved?
Yes, it has moved a lot. First of all, you have been growing -- I know everyone disappointed here with 5.7 percent and not 7 percent but that is still a lot of growth and of course you should aspire to do 7 or 8 percent or something like that. I think your Prime Minister has done some very smart tough things to do. It is amazing that he has a majority but the tax he has put in place, finishing the biometric, bankruptcy laws, real estate; these are the things that the public say it's great but they are setting a road to have better growth forever. So, I think it is a great thing and growth is what is going to enable you to look up to your people and do the next round of things like affordable housing, better education etc.

Q: But growth hasn't come. It has fallen from 7.6 to 5.7 percent and even your brokerage has gone neutral on India because the earnings growth is not double digit. The earnings growth started off, the estimate started off at 14 and even 18 by some brokerages and is now 8. Is that a worry?
No. Again, I am not a politician but what a country needs to do is setup all the things that make a country grow; education, health, infrastructure, competitive tax system. So I know for a fact, when I come back in ten years, India is going to be a lot bigger than it is today. Of course you want 7-8 percent and not 5 percent. I think you all react to a short-term number. You can get bigger short-term number but make the wrong policy decisions. You are making the right tough policy decisions, sometimes it does have a small negative number, like your demonetisation maybe - but if you reduce corruption, if you create a digital world that you are talking about, it will lead to far bigger growth in future and lifting up all the Indian people.

Q: Demonetisation, I have heard your positive comments on that, but actually lost us a lot of informal jobs, we are told?
I have read all the things about it and no one has quite ever done it but it also in my view created a lot of bank accounts, you reduced a bunch of corruptions you do not know about, put a lot of things back into real system. So it had all these benefits and maybe it had some negatives. Other countries are talking about doing it too, so I am sure it will be deeply studied what you did here.

Q: Let me come back to the growth issue. While you say that you don't worry about one quarter getting to 5.7 percent and that is a good number, the government is not thinking on those lines, after all the finance minister spoke at your conference and it looks like they may even increase the fiscal deficit to ensure some stimulus. Is that a good thing to do, we already are at about 3.2 percent?
I think it is okay. Remember, your deficit has been coming down, your rupee is being getting stronger, and the country is growing at 5.7 percent, they should have their own goals and aspirations and there are a lot of policy tools. What they need to do is figure out which one they want to execute, how they want to execute it, what they can accomplish, what pros are there and what the minuses are. So, I don't think government will say, you can't get the deficit up at all. In United States, I think competitive tax reform is more important than how to fix the deficit in one year. So, I think you should think about good long-term policies, spend more time thinking about that and why it is good to do and not do the wrong thing because of a short-term number.

Q: Let me come to the other big challenge in front of the Indian government and the finance minister spoke about recapitalising public sector banks at your conference. How would you tackle the Indian public sector bank problem?  
I will give you a long-term view; I think a lot of countries have state owned enterprises, I think in general they are a bad idea. They lead to a lot of corruption, misuse of resources, particularly in banks - I am not talking about India, but particularly in banking, they lend to friends locally, they support businesses which should be allowed to shrink or go bankrupt. So, I am kind of against having a public banking sector. There are reasons to have public owned entities; I am not arguing that, we could talk about each industry and why it might be better-off for people this way than other way. So I am not saying it should be just one way, you should recapitalise but you should say with new governance going forward so it does not happen again.

We have seen a lot of credit recapitalised and then recapitalised again in 12 years and again in 12 years. The reason people lend is to keep jobs and all these are kind of bad reasons in the long run, but good reasons in the short run. So, I think your government has been doing the right thing looking at industry-by-industry whether it be public, or whether it be private, how it should be recapitalised and it will be very important to future growth. If we go to China for example, now they have a lot of state owned enterprises and they understand that is part of the reason they have high corruption, misuse of assets, that is why they talk about market reform. Those assets would be far better used in the public market than privately.

Q: Korea for instance, many countries privatise their state owned banks under duress. We are probably having the luxury of recasting them in peace times, in normal times. What would the advice be, should they be privatised or should they be reformed in the public space?
I would start with the path of privatisation. You will have a healthier enterprise, it may have a different mission in other banks, so you go to a lot of countries and say this bank will be doing local agriculture, I would begin the reprivatisation, that will put better transparency, better governance and probably the chance you won't have to recapitalise again. Some countries have done a very good job of allowing institutions to manage themselves properly while being owned by their governments; others they are constantly interfering with it and that becomes a huge problem.

Q: You spoke about the bankruptcy code and that has brought a lot of stressed assets into the bankruptcy courts. Do you see a lot of Indian assets getting bought, foreign interests in them? What is your overall comment on the bankruptcy process?
I am not an expert in Indian bankruptcy process. I do think if we go again country-by-country, it is important you have an efficient process. It allows people to go bankrupt, be restructured, reuse and repurposing of assets, it is a healthy thing to do properly and effectively and quickly. It is not a healthy thing when these things exist for 10-20 years in a court.

Q: This is the first time, the only time I guess I have the privilege of probably talking to a potential US Presidential candidate, am I?

Q: Let me come to the other issue that you have been in the news for, Bitcoin. You called it a fraud but I believe your own units have been buying them on dips?
No. We don't buy it on dips. I think that we have done something with the Bitcoin Exchange. Separate Blockchain is a technology which can be used for multiple things including cryptocurrency, could be used for digital dollars and there are digital dollars. A lot of the dollars hold in our bank are digital. So, separated technology.

What I have said about Bitcoins is if it's a country's formal currency. You have a wonderful currency, when you formed your nation in 1947, when the first thing you did is, create a central bank with the currency and that currency is part of your national heritage and on the back it has got the 17 or 19 languages. Countries form their currency, they like to control the currency so right now, I say these cryptocurrency is kind of novelty; people think they are kind of neat but the bigger they get, the more government is going to close them down and they also use a lot for illicit purposes. So you are seeing China going after them so that is why I have said that.

You can like it or not like it, my own view is that eventually the government is going to close it down; they like to control their currency like who has it, where it goes, why it goes, when it goes, they like to see it and the cryptocurrency is the opposite. So again I prefer digital, you might have to have cryptodollar, I would prefer that than a cryptocurrency.

Q: It is just that ultimately old currencies are created out of thin air and there is a central bank backing, there is a sovereign backing but it is still created out of thin air and this currency at least has a stable quantity.
Those central banks -- it says legal tender, you have to take this as payment. It is very cheap to do, it is very easy to move back and forth - JPMorgan moves USD 6 trillion around the world everyday very efficiently, very quietly, very effectively and very cost efficient.

It is all digital money moving around the world. What is the problem we are trying to solve - I am not against the technology but creating money out of thin without having a government backing is very different than creating money having a government backing.

It is not unlimited, Bitcoin has that no more than 21 million so maybe that kind of does something there but there is Ethereum, there are ICOs (Initial Coin Offering), there are cryptocurrencies everywhere. It is creating something out of nothing and that to me is worth nothing.

Q: You think they could end badly, is that the fear?
It will end badly. It will end when governments, when people lose a lot of money, the government is going to come down, when people use it as an investment or it becomes too big, where government will say we want to control it now. I have had many people say, how can you control Bitcoin? It is very simple, if you buy or sell a Bitcoin, I am going to put you in jail, it is over. You watch what is going to happen in China. Doesn't mean people won't do it, it just means it will be a black market which is a whole different thing.

Q: What is your big takeaway from India? You have gone through this conference where you have met a lot of bright people and of course many politicians as well, what is the big new message you are taking home?
You have terrific leadership and that leadership is making a change for all the Indian people and some of that will be generational and it is hard to do. So my view is if you look at the hard change, it is going to be great for the future of India and that is my takeaway.

I want the public to know, we have Indians who runs huge parts of our company including investment banking, M&A in the US which is a pure male domain, but it is an Indian female. The person who runs our global technology for the investment banking is an Indian, our head of emerging markets for currency is an Indian. So, we have been blessed with a really smart Indian talent with us.

(Disclaimer: CNBC-TV18 is a part of Network 18, publisher of Forbes India)